54 PARTONE Introduction 2-7_ INTERFERING WITH VERSUS WORKING THROUGH THE MARKET In the analysis presented so far in this chapter, we have implicitly assumed that the market is allowed to operate without government or other interferences. In that case, demand and supply determine the equilibrium price and quantity for each commodity or service. If, on the other hand, the government interfered with the operation of the market by imposing effective price controls (say, in the form of rent control or an agricultural price-support program), the market would not be allowed to operate and a persistent shortage or surplus of the commodity or service would result. Contrast this situation with working through or within the market (as, for example, with the imposition of an excise tax). Working through the market would result in a shift in demand or supply, but the equilibrium price and quan- tity of the commodity or service would still be determined by demand and supply, and no persistent shortage or surplus would arise. Current, real-world examples can illustrate the differences. Case Study 2-4 shows the detrimental effect of rent control in New York City. Case Study 2-5 shows the waste that results from U.S. agricultural price-support programs and why many people want to do away with them. On the other hand, Case Study 2-6 examines the economic effects of working through the market with the imposition of an excise tax. By interfering with the working of markets, rent control, price ceilings on gasoline, and agricultural price-support programs create huge waste and inefficiencies in the econ- ‘omy. These arise because markets communicate crucial information to consumers about the relative availability of goods and services, and to suppliers about the relative value that consumers place on various goods and services. Without the free flow of information transmitted through market prices, persistent shortages and surpluses—and waste—arise Working through the market (ee Case Study 2-6) leads to different (and better) results. CASE STUDY 2-4 Rent Control Harm the “There is probably nothing that distorts a city worse than rent regulation, It accelerates the abandonment ‘of marginal buildings, deters the improvement of ‘2004 ones, and creates wondrous windfalls for the ‘middle class—all the while harming those it was ‘meant to help, the poor."* The vast majority of econ ‘omists agree. Rent control was adopted in New York City as an emergency measure during World War I, ‘but ithas been kept ever since. Although rent control is most stringent in New York City, today more than 200 cities (including Washington, D.C., Boston, Los ‘Angeles, and San Francisco) have some form of rent ‘control, More than 10 percent of ental housing inthe ‘United States is under rent contro Rent controls are price ceilings or maximum rents set below equilibrium rents. Although designed to keep housing affordable, the effect has been just the opposite—a shortage of apartments. For exam- ple, Figure 2-10 might refer tothe market for apart ‘ment retals in New York City. Without rent control (and assuming, for simplicity, that all apartments fare identical), the equilibrium rent is $1,000 and the equilibrium number of apartments rented is 1.6 million. Atthe controlled rent of $600 per month, continuedCHAPTER 2_Demand, Supply, and Equllbrium Analysis continued 2 million apartments could be rented. Only 1.2 mi tion apartments are available a that rent, so there is ‘ shortage of 800,000 apartments. Indeed, apartment seekers would be willing to pay a rent of $1,400 per ‘month rather than go without an apartment when nly 1.2 million apartments are available.* Rent control introduces many predictable dis- tortions imto the housing market. First, as we have ‘een, rent control results in a shortage of apartments for rent. This is evidenced by the great difficulty and time required to find a vacant, rent-controlled partment torent. Second, owners of rent-controlled apartments usually cut maintenance and repairs to reduce costs, and so the quality of housing F E 1& ‘= i ie 2 Aeteriorates. Because of the shortages to which reat ‘control gives rise, however, partments vacated as a ‘result of inadequate maintenance canbe filled easily ‘and quickly. Third, rent control reduces the return ‘on investment in rental housing, and so fewer rental apartments will be constructed; Fourth, rent control encourages conversion into cooperatives (since their price is not controlled), which further reduces the supply of rent-controlled apartments. Finally, with rent contro, there must be a substitute for market price allocation; that is, nonprice rationing is likely to take place as landlords favor families with few ‘or no children or pets and families with higher 12 16 20 itions of apartments FIGURE 2-10 Rent Contro! apartments could be rented. Only 1.2 mili 30 there is a shortage of 800,000 milion, At the controlled rent of $600 per month, 2.0 million lon apartments are available at that rent, apartments. Apartment seckers would ’be willing to pay a rent of $1,400 per month when only 1.2 million apartments are available Source: Mel or Destroying Cy" The Wal Sire! Jeurnl (March 2, 1993, AB, “Rent Deregulation Has Risen Sarpy Under 1997 Law The New Yok Times (August, 1987) p.B td “Tae Gest Manbatan Ripof=The Economie, 2009), FP 5-36 “nd Rent Como" The New York Timer (May 12,1987 12 “A rice cling tr shove the equiv pric has no cfc, Far example, eat is 3.000 andthe number of apients rented is equal {0 16 milion in Figure 2-10 reales of whether arnt cing f $1000 o high is imponed. Only i conor the anion et lowe ty lewis below teers ret of $1,000 dows chor of aperment forrest, "To verome his, et cont ive wha exept ne operant "Many locales ane passed laws esto this race